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Korea Crisis Has Silver Lining for Markets as Backstops Kick In

(Bloomberg) -- South Korea’s brief lurch to martial law this week spooked markets, but rapid action by officials to restore democratic norms and reassure investors has limited the damage – at least for now.

Korea’s five-year credit default swap, the cost of insuring against sovereign default, declined on Thursday and remains well below its highs for the year. The selloff in the country’s benchmark Kospi index also appeared to be losing steam, and the won has largely retraced its losses in the immediate aftermath of President Yoon Suk Yeol abruptly declaring — and almost as quickly rescinding — martial law.

Market sentiment has been helped by the fact that martial law lasted only around six hours, and was quickly followed by central bank moves to restore calm. The Bank of Korea talked down the economic impact of the political crisis, promising to provide “unlimited liquidity” if necessary. It also expanded its use of repo operations to boost liquidity in the market.

“The rapid response from financial regulators has validated South Korea’s institutional strength,” said Sheldon Chan, a portfolio manager for Asia credit at T. Rowe Price Group Inc., who called it a “silver lining” to recent events. “A peaceful resolution demonstrates South Korea’s political maturity in addressing anti-democratic actions without descending into chaos.”

S&P Global Ratings said Thursday that the country’s AA rating wasn’t likely to change in the next year or two due to the recent turmoil. The ratings agency pointed to the quick return to normality as a sign that the credit impact was likely to be muted.

“The return to relative stability without serious violence showed that checks and balances in the political system are functioning,” wrote the S&P analysts in a report. “We believe this will likely mitigate the damage to investor confidence.”

That sentiment echoes the stance taken by Bank of Korea Governor Rhee Chang-yong, who hailed his fellow citizens as “mature” for carrying on and pointed to the stock market operating normally as a sign of the economic resilience.

That doesn’t mean Korean investors are out of the woods just yet. The political turmoil is another headache for a country that was already suffering from slowing growth and worries about its exposure to a trade war when Donald Trump returns to the White House.

“In terms of the credit impact, the impact of the martial law itself is very limited because it was such a short period of time,” said Anushka Shah, a senior credit officer at Moody’s Ratings. “The whole risk really comes if this is prolonged and you have a protracted period of volatility and uncertainty and that starts to weigh on other aspects of the economy.”

The Kospi index was down around 0.5% on Thursday, after declining 1.4% in the previous session. The won was around 0.17% lower.